perfect compettion
DESCRIPTION
market structure.............. price and out determination under perfect marketTRANSCRIPT
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Perfect Competition
P sivakumar Economics Faculty
INC-Coimbatore
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MarketMarket is a place where buyers and
seller gather in order to buy and
sell a particular goods orcommodity. It is not restricted to abuilding, place or area.
Kinds of MarketPerfect
CompetitionMonopoly
MonopolisticCompetition
Oligopoly
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Perfect Competitiona) large number of buyers and sellers b) product homogeneity
c) free exit and entry of rms d) prot maximiation e) no go!ernment regulation f) perfect mobility of factors of production
g) perfect knowledge h) absence of transport cost
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"upply and #emand inPerfect Competition
$% &M%
' (
*uantity
Price
P
Price
' (
*uantity
P+
"#
" #
Industry irm
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#emand cur!e of perfect
competition -he demand cur!e in perfect
competition is innitely elasticity
which indicates that the rm cansell any amount of output at thepre!ailing market price.
P AR =MR
o
output
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+uilibrium conditions MC & M%
MC should cut M% from below
If the abo!e two conditions fullledthen rm said to be in euilibrium
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"hort run +uilibrium -% / -C Method
In this method a rm is in euilibrium when
it maximies its prot, dened as thedi0erence between total cost and totalre!enue.
O
TRTC
Xa XeXb
Max
ofprofit
loss
Loss
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"hort %un +uilibrium
of the irms "uper 1ormal Prot
when $%2"$C
1ormal Prot
when $%&"$C
Minimum 3osswhen $%&"$4C but $%5"$C
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Measuring Prot if P 2 $-C
d = MR
MC
ATC
Quantity1 2 ! " # $ %
price
prot
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Measuring 3oss if P 5 $-C
MC
ATC
d = MR
&uantity
price
1 2 ! " # $ %
loss
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Marginal re!enue / marginal
cost methodIn the short run rm can earn normal prot,
super normal prot and also losses.
MC
AC
AR=MR
e
o
p
'
AR=MR
AC
MC
ep
p1 e1
'o
MC AC
e1
ep
p1
o '
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Industry euilibrium in the
short run6i!en the market demand and the
market supply the industry is in
euilibrium at that price at which theuantity demanded is eual to theuantity supplied.
s(
(s
e
''1 '2
ee
e1
p p
p1
p1
e1
p
AcMc Mc Ac
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3ong run euilibrium of
industry -he industry is in euilibrium in the long run
when price is reached at which all rms are ineuilibrium. -he industry produces at theminimum point of 3$C cur!e and makes onlynormal prot.
s
(
s (
p
o&
LAC
)AC
LMC
)MC
Xo
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"hut #own cost 7 Pricing In short run the rm may continue its
production process, e!en if it incurs
loss -he maximum amount of loss that
the rm is willing to bear in the shortrun eual to the total xed costs
8hen a rm fails to reco!er its total!ariable costs, the rm will stop itsproduction
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"hort9%un "upply :nder PerfectCompetition
*+"*
1,***
2,***
!,***
",***
$,***
1+**
2+**
-+"*
2+"*
MC ATC
d 1=MR
1
AVC
(a)
.irm/s )upplyCur0e
*+"*
2,***!,***
",***
$,***
1+**
2+**
-+"*
2+"*
(b)
d 2 =MR
2
d 3=MR
3
d 4=MR
4
d 5 =MR
5
Bushelsper Year
Dollars Price perBushel
Bushelsper Year
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#eri!ing -he Market "upply Cur!e
*+"*
1+**
2+**
-+"*
2+"*
Maret )upplyCur0e
2**,***!**,***
"**,***$**,***
.irm/s )upply Cur0e
*+"*
2,*** !,***",***
$,***
1+**
2+**
-+"*
2+"*
1+ At eac price + + ++Te total supplie( by all firms at (ifferent
prices is te maret supply cur0e+
Firm Market
Bushelsper Year
Price perBushel
Price perBushel
Bushelsper Year
2+ te typical firm supplies teprofit3maximi4ing 'uantity+
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I1 -;+ 3'16 %:1
5en (eman( increases from D* to D1, entry occurs an( te
maret supply cur0e sifts from S * to S 1+ Te long3run maret
supply cur0e, LS A, is ori4ontal+
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<=.= I1 -;+ 3'16 %:1
5en (eman( increases from D* to D2, entry occurs an( te
maret supply cur0e sifts from S * to S 2+ Te long3run maret
supply cur0e, LS B, is up6ar( sloping7external (iseconomies+
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<=.= I1 -;+ 3'16 %:1
5en (eman( increases from D* to D, entry occurs an( te
maret supply cur0e sifts from S * to S + Te long3run maret
supply cur0e, LS C , is (o6n6ar( sloping7external economies+
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Eciency ofCompetitive markets
Wen allocation of resources results inma!imum possible net bene"t
Properties of allocative ecency
#a$ Ecient allocation of resources amon%"rms # E&uilibrium of production$
#b$ Ecient distribution of %oods#E&uilibrium of consumption$
'Ecient combinations of products#simultaneous E&ui of production (consumption$
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Wen an ecient allocation ofresources ave been attained) it is
not possible to make any person inte society better-o* +itoutmakin% someone else +orse-o*
,ny can%es in te productive
metods or furter e!can%e of%oods and services can not resultin additional net %ains if resourcesare eciently allocated
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o
MC )P)Mar%inal bene"t
MC
Marginal benet
$
>
+
<?
<@
?
?@ A?
3o!es of bread per day
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+Bcient 'utput of a 6ood
-he maximum price a buyer willpay for another unit of a good is
called the marginal benet of thegood.
-he minimum price a seller will
accept for making another unita!ailable is its marginal cost.
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e mar%inal bene"t is assumed todecline +it consumption of bread)
+ile te mar%inal cost is assumedto increase. Net %ain / M0 1 MC # point 0$
producer better-o*
,t point , consumers +ould bebetter-o* ,t point E mutual %ains is possible
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+0ect of -axes on Priceand *uantity
Imposition of a 3ump
"um -ax Imposition of a Prot -ax
Imposition of a "pecic"ales -ax
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Imposition of a 3ump "um -ax
Increase in xed cost
:pward shift of $C and $C cur!es
$4C and MC do not a0ected
In short run no e0ect on
euilibrium In long run supply will decrease
and price will increase
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Imposition of a Prot -ax
+0ects are same as those of alump sum tax
1o e0ect on MC and short runeuilibrium of the rm andindustry
In long run supply will decreaseand price will increase
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Imposition of a "pecic"ales -ax
It a0ects MC cur!e of a rm
>urden of tax on consumer depends
on price elasticity of supply withgi!en demand
-he more elastic supply, the higher
burden of a specic tax onconsumer and less the burden onthe rm
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Market supply is perfectly elastic entire tax burden goes to
consumers "upply cur!e is negati!e one then
imposition of specic tax results in
an increase in price, which isgreater than tax
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